MERP or Health Insurance: Which Should I Offer My Employees?

For many small and mid-sized employers, the cost of group health insurance is just out of reach. And sometimes, even businesses that can afford it can only do so if they pool their resources with other small employers. Fortunately, there’s a midway point between offering a full-fledged health care plan and offering nothing at all: MERPs.

What Are MERPs?

MERPs stands for Medical Expense Reimbursement Plans. They allow employers to reimburse employees for out-of-pocket medical expenses, entirely free of tax. If the MERP is administered correctly, then:

1. Employees will not have to pay income tax on reimbursements;
2. Reimbursements will not be subject to payroll tax; and
3. Plan costs and reimbursements will be deductible to the employer.

MERPs are a lot like Health Reimbursement Arrangements (HRAs), but they allow for more flexibility. MERPs reimburse employees (and their spouses and dependents) for most medical expenses, including:

• Copays
• Prescriptions
• Over-the-counter medications
• Face masks
• Birth control and condoms
• First aid kits
• Menstrual care products
• Prosthetics
• Ambulances
• Vision and dental care
• Substance abuse treatment
• Psychiatric care and counseling
• Chiropractic care
• Physical and speech therapy
• Acupuncture
• Transportation to medical care
• Vaccines
• Wheelchairs
• Medical devices like insulin pumps, breast pumps and blood pressure monitors

Here’s how they work:

1) Employers establish reimbursement allowances. Employers determine a monthly reimbursement allowance for each employee. There is no annual minimum or maximum amount required. Employers can fund their MERP as their employees’ reimbursement allowances grow, or they can pay expenses from their operating budget as reimbursement requests come in.

2) Employees pay for their own health care costs. If their employer offers a health care plan, employees can pay for qualified out-of-pocket expenses not covered by insurance, as well as for copays and coinsurance. If their employer does not offer a group health care plan, they can use their MERP to pay for the costs of acquiring outside health insurance and any other qualified medical cost.

3) Employees submit medical receipts. After making a health care purchase, employees must submit proof in the form of documentation showing the date the expense was incurred, who was being treated (the employee, their spouse or a dependent) and a description of the service. This document could be a receipt or explanation of benefits.

4) Employers reimburse employees. Once employers review the submitted medical receipts, they reimburse employees. Employees can be reimbursed up to the amount they’ve accumulated in their account. Typically, MERP accounts accumulate monthly and unused funds expire at the end of the year, but specific rules can be outlined in the MERP documents.

How Should My Company Use a MERP?

There are a few ways businesses can incorporate a MERP into their benefits package:

• Use MERPs in lieu of group health insurance. Small businesses not legally required to offer health insurance can invest in an MERP to help their employees find insurance elsewhere.
• Use MERPs in addition to group health insurance. MERPs are often bundled with high-deductible group health plans to help employees cover deductibles and out-of-pocket expenses.
• Use MERPs to expand upon group health insurance. MERPs can be a great way to help employees pay for services not covered by the company’s health care plan, like vision and dental.

Should I Offer a MERP, Health Insurance or Both?

Although MERPs aren’t a substitute for health insurance, they can help small businesses bridge the gap between offering nothing to their employees and supporting their needs as best they can. If you’re choosing between offering health insurance and a MERP or are considering adding a MERP to your current benefits package, here are a few questions you can ask yourself.

How many of my employees need medical coverage? If your employees tend to have spouses with insurance or are dependents, they may not value health insurance as much as a medical expense reimbursement plan.

How easily can my employees obtain health insurance in the marketplace? Ask yourself if your employees can afford outside health insurance. You should also consider if they have the resources they need (like education and community resources) to obtain and maintain coverage.

How expensive would outside health insurance be for my employees? This can help you determine if your MERP could cover a good chunk of your employees’ premiums.

Do other businesses in my industry offer health insurance to their employees? You’ll want to consider how having no health insurance could affect your standing in the job market.

What type of insurance can our business afford? If insurance is not affordable, a MERP may be a better option.

Do I have the resources and time to establish an electronic system for MERP reimbursements? Expense reimbursement programs work best when employees can see what they’ve accumulated and what funds they have remaining in their account. Make sure you’d have the time, finances and administrative support to maintain a MERP program.

Are employees happy with the medical coverage I currently offer? If your coverage doesn’t meet their needs, they may appreciate getting the chance to choose their own plan in the marketplace.

Just like with MERPs, there are tax incentives to offer health insurance. Corvee tax planning software can show you how adding a MERP or health insurance plan to your benefits package would affect your bottom line — and offer dozens of other valuable tax savings strategies to help keep your business growing.